Not all uses of time are equal and this simple truth can make a big difference in life.

People who spend their time doing more profitable work make more money. People who spend their time investing in others build better relationships. People who spend their time creating a flexible career enjoy more freedom. People who spend their time working on high-impact projects contribute more to society. Whether you want more wealth, more friendship, more freedom, or more impact, it all comes down to how you spend your time.

If you’re like me, you probably want the things listed above (friendship, freedom, impact) and others too (health). But you can’t have everything at once, so you need to understand how to effectively manage the tradeoffs that you face on a day-to-day basis.

This article explains how to figure out what your time is worth and use that information to spend your time more effectively. Understanding how to get the most out of your time starts with knowing—in exact terms—what your time is worth.

The value of time: What is one hour worth?

A few weeks before I began writing this article, I was shopping for a small travel bag. After much searching I found one that I liked and, at just $19, it was very affordable. But there was one problem: the bag was made by a company in the United Kingdom and it cost $45 to ship it to the United States.

I was immediately turned off by the idea of paying $45 to ship a $19 bag, so I searched for retail stores. The company had a physical location in New York City and I was already planning to visit the city a few weeks later. I looked up the store location and realized that it would take me about one hour to go out of my way and stop at the store during my trip.

That’s when I thought of the question that prompted this entire article: “Was one hour of my time worth $45?”

Should I save time and pay $45 to get the bag shipped to me? Or should I save cash and spend one hour of my time going to pick it up in person? I had no idea if going to the store or paying extra for shipping was a better use of my time and money.

The time vs. money dilemma

At some level, we all have an internal gauge for how much our time is worth. For example, if someone offers to pay you $0.07 for one hour of work, you would immediately decline. Meanwhile, if someone offers to pay you $7,000 for one hour of work, you would immediately accept.

On extreme ends of the spectrum, it is easy to know if a task is worth your time. As you move toward the middle of the time-value spectrum, however, it becomes less clear if a particular task is worth your time or not. And this is the problem: most of life is lived in the gray zone of the time-value spectrum.

For example:

Should you buy the nonstop flight and save two hours or get the flight with a stopover and save $90?

Should you pay your neighborhood teenager $20 to mow your lawn so you have an extra hour free on the weekend?

Should you spend this week working with a client that will pay you $2,000 right away or working on a business idea that could generate $20,000 over the next year?

We make choices like these everyday, but most people base their decisions on gut feelings or guesswork and never calculate what their time is actually worth. Everyone has an hourly value, but very few people can actually tell you what that number is. Until recently, I was no exception.

How to calculate what your time is really worth

My time vs. money dilemma prompted me to reach out to every expert I could find on the subject. I talked to entrepreneurs, productivity consultants, executive coaches, and even professional poker players about the best ways to determine how much my time was worth and how to make better decisions based on that information.

Then, I tracked every hour I spent over a three-month period and calculated the value of each hour using six different equations. Don’t worry. I’ve distilled all of this research and experimentation into a fairly simple process, which I’ll cover right now.

The remainder of this article is divided into two parts.

Part I is fast and easy, and covers everything most people will need.Within 15 minutes, Part I will help you develop a reasonable estimate of what your time is worth and you’ll be able to make more informed decisions because of it. I recommend everyone read Part I.

Part II is time-consuming, but valuable. In particular, entrepreneurs and executives will find Part II useful. Part II builds upon Part I and helps you assess the expected value of different uses of time, so you can make better strategic decisions that will pay off in the long-run.

Before we dive into Part I, I’d like to share a free spreadsheet I created with examples of every equation in this article. You can use this spreadsheet to plug in your numbers and get an immediate value for your time. I will be referring to this spreadsheet throughout the remainder of this article. (Free download: The time-value spreadsheet)

Part I: Realized income methods

We will start by using Realized Income Methods to calculate the value of your time. These calculations are based only on income you have actually received (or realized), hence the name Realized Income Methods. These calculations will help you make better decisions about how to spend money on day-to-day purchases. (i.e. Should I pay $45 for shipping or should I drive to the store?)

To get started, you need two numbers:

The amount of time you spend to earn money.

The amount of money you earn during that time.

Let’s talk about how to measure these two factors and come up with a quick estimate for the value of your time.

Step 1: How to track your time

The first step is to measure the total amount of time you invest to earn money, not just the hours you are physically at work. For example, if you spend one hour commuting to work each day and eight hours at work, then it cost you nine hours to earn money that day. Similarly, you should add in any time you spent working on a side hustle or dropping your kids off at daycare. Using these numbers, we are trying to get a complete picture of the total amount of time you invest each year to earn money.

If you struggle to come up with an estimate for your time, you’re not alone. Most people only have a vague sense of where their 24 hours go each day. If you’re unsure how much time you spend working, I recommend using 2,500 hours per year as a starting point.

Here’s why:

Let’s say you spend 10 hours per day either at work, commuting to work, or doing tasks related to work. With a five day workweek, that’s 50 hours per week. And if you work 50 weeks per year (2 weeks off for vacation), then that’s 2,500 hours per year. I’ll leave it to you to make adjustments based on your specific circumstances, but for most full-time employees or entrepreneurs, I think 2,500 hours will get you in the right ballpark.

Tracking time: How I did it

As an online entrepreneur, I spend most of my time working on the computer. When I started measuring my time, I installed a software tool called RescueTime. RescueTime records the exact amount of time I spend on each task: how much time I spend reading each website, using each software program, browsing social media, and so on.

After I collected three months worth of data, I compiled numbers from other applications to round out my estimates. For example, I added up all of my listening time on Audible to estimate how much time I spent “reading” books.

Using the numbers from RescueTime and a few reasonable estimates, I found that I spend about 2,742 hours working per year.

Because of RescueTime’s category-by-category breakdown, I was also able to group my time into specific areas like writing, reading, website design, marketing, and so on. This detailed breakdown isn’t necessary, but it will come in handy during Part II of this article. For now, all you need is a reasonable estimate of the total amount of hours you spend to earn money each year.

Step 2: How to track how much money you earn

The second factor you need to know is how much money you earned during the time you spent working.

This is pretty simple. If you’re an hourly worker or a salaried employee, just look at your latest paycheck and multiply that by the number of paychecks you receive per year. If your pay hasn’t changed much this year, you can also look at your tax return from last year and just use that number. You should also

include money from side hustles and freelancing gigs because the time you spent on those activities is included in Step 1.

The number we are trying to calculate is your take-home pay. This is the amount of money you have left after deducting taxes. For most employees, taxes are withheld from your paycheck, so your take-home pay is basically what you get paid. If you are a business owner, however, you should deduct taxes and business expenses from your top-line revenue.

Tracking money: How I did it

I use a service called Bench Accounting to track my business income and expenses. Bench is an online bookkeeping service that automatically pulls the data from my business accounts and then a bookkeeper compiles everything into tax-ready financial statements. With a few clicks, I can see how much money I’ve earned during the previous month, quarter, or year.

If you are also an entrepreneur, I recommend using yearly earnings for these calculations because small business income can fluctuate (sometimes drastically) from month to month. Looking at your earnings over a longer time period helps to smooth out these inconsistencies and provide a more realistic value of your time.

Step 3: Calculate the value of your time

If you make $12,316/year, your time is worth $4.93/hour. This is the 2014 poverty line for an individual in the United States.

If you make $46,226/year, your time is worth $18.49/hour. This is the 2014 median income for women in the United States.

If you make $62,455/year, your time is worth $24.98/hour. This is the 2014 median income for men in the United States.

If you make $100,000/year, your time is worth $40.00/hour.

If you make $1,000,000/year, your time is worth $400.00/hour.

Again, all of these numbers assume that you are working 2,500 hours per year. Obviously, the numbers will shift if you work more hours or fewer hours.

Are these numbers accurate?

When I first calculated these numbers I was surprised. The value of an hour of my time was much lower than what I thought it would be.

Think about how many freelancers charge $40/hour, but don’t make $100,000 per year. Or consider how many consultants charge $400/hour, but don’t make $1,000,000 per year. How can this be? The answer is these people are only being paid $40/hour or $400/hour for some of their hours, not all of

their hours. When we divide their total income by the total time spent working, the value of each hour is much less than what they charge for a given hour of work with a client.

Furthermore, although we might know what we would charge per hour, we rarely calculate how much time goes into earning money outside of our working hours. By accounting for all of the time we invest to earn money, we get a clearer picture of what our time is actually worth—and it is usually much less than what you would charge for an hour of work on your job.

Now, if you’re like me, you’d like to verify the accuracy of this first calculation. There are a few quick ways to check to see if your hourly value is accurate. Let’s cover them now.

Checks and balances

The method we just used to calculate the value of your time is called the Take-Home Pay Method because it is based on your take-home pay. There are two other types of Realized Income Methods that we can use to check the accuracy of your Take-Home Pay Method. I’ll explain them briefly below, but I think the easiest way to understand them is to look at the examples in Step 3 of the Time-Value Spreadsheet.

Market Rate Method – The Market Rate Method is the first way to check your numbers. The Market Rate Method is the rate you could expect to earn if you were hired by another company for a job you were qualified to perform. For example, I spend a lot of my time writing, so I could be hired for a Content Creator position. I also spend time growing the business, so I could probably be hired for a Business Development role. I looked up the salary for each role I was qualified for and then divided by the amount of hours I work to get another estimate for the value of my time. You can think of this method as what your time is worth on the job market.

Cost-Based Method – The Cost-Based Method is another way to verify your numbers. The Cost-Based Method is the rate you would pay someone else to do the work that you do. In other words, imagine you are the boss and you have to hire someone to do your job. I started by dividing my job into specific tasks (writing, marketing, etc.) and estimating the amount of time I spent on each task. Then, I plugged in what I would be willing to pay someone to do that task full-time. Then, I calculated a weighted average of all of the tasks to come up with an overall rate that I would be willing to pay someone to do the work that I do each day. Finally, I divided what I was willing to pay by the total number of hours worked.

Once I have numbers for all three methods, I calculate the average value of my time. I figure that I might be estimating high for one method or low for another, but the value of my time is probably accurate when we take the average across all three methods. Again, you can see each method in the Time-Value Spreadsheet.

How to use this information

We have now completed Part I. With the calculations above, we were able to determine a quick and accurate estimate of what your time is worth. Now we can narrow the zone of uncertainty and make better decisions.

For example:

If you know your time is worth $25 per hour, then you should never wait in line for 30 minutes to get a $10 gift card.

If you know your time is worth $60 per hour, then you should always pay $49 for shipping instead of spending one hour shopping at the store.

If you know your time is worth $80 per hour, then you should always buy the direct flight that saves you two hours even if it costs $150 more than the flight with a stopover.

Once you know, in dollars and cents, how much an hour of your time is truly worth you can make better decisions on a daily basis.

At this point, we know your time is worth at least the number you calculated in Part I because Realized Income Methods only account for income you have already earned. Ready to see if your time is actually worth more? Let’s dive into Part II.

Part II: Expected value methods

This brings us to the second way to calculate the value of your time: Expected Value Methods. These calculations are based on the value you expect a given hour of work to create in the long-run.

Expected Value Methods can help you make big, strategic decisions about where to spend your time. What projects should your business focus on this year? Which uses of time aren’t effective and should be eliminated from your daily work routine? Should you start a business that could payoff big time in ten years, but won’t make any money right away or work a stable job with a reliable income? What is the best way to manage these tradeoffs?

Let’s start with the simplest type of Expected Value Method.

The growth multiple method

There is a simple way to account for the expected value of your decisions. Take your net income from the previous year and multiply it by a reasonable growth multiple.

The key, of course, is selecting a reasonable growth multiple. For example, my business doubled from last year to this year, so I chose 2x as the growth multiple. With this method we are essentially saying, “Your actions from this year will continue to drive growth over the next 12 months, so the true value of your time is actually higher than your realized income indicates today.”

The Growth Multiple Method is an easy way to estimate how the work you are doing today will payoff in the long-run, but it doesn’t tell you anything about how to use your time more effectively. For that, we need to use the full Expected Value Method.

The expected value method

The Expected Value Method is the final, and most difficult, way to calculate the value of your time. I’m going to try to explain this in the simplest way possible, but I think the easiest way to understand it is to look at the calculations in Step 4 of the Time-Value Spreadsheet.

Here’s the basic logic:

Start by breaking your time out by task. The more detailed you can be about each use of time, the better you can distinguish which areas drive the most value.

Find a unit of measurement that connects the tasks you work on with the income you earn. For most business owners, this means you need to know the value of a “lead” in your business. In my particular case, I use email subscribers because I know the average lifetime value of a new email subscriber and most of my tasks can be linked to getting more email subscribers in some way.

Estimate the value of each task. Let’s say I spend one hour working on a task that results in 50 new email subscribers. If the lifetime value of each subscriber is $1, then the expected value of that task is $50/hour. Repeat this type of expected value estimate for every task you work on.

Add all of the expected values together to determine the total expected value of your time.

Add extra variables as desired. Expected Value Methods can be as complex as you want to make them. You can account for factors like how much happiness a particular task brings to your life or how likely it is for this hour of work to continue to payoff years from now.

Expected Value calculations are highly individualized and you’ll probably have to wrestle with the equations for awhile to get them to work for you. Again, I think it’s easiest to see this worked out in numerical form. You can see all of the factors involved in this calculation in Step 4 of the Time-Value Spreadsheet.

Additional notes

There are a lot of extra thoughts that go on behind the scenes of these calculations. Here are some additional factors I keep in mind when considering the value of my time.

Misguided success – Don’t waste your time becoming successful at the wrong thing. Simply understanding the value of your time is helpful, but you need to know what you want out of life to get the most accurate idea of the value of your time. Too many people chase money or power or approval because everyone around them does the same. What if that’s not what you really want? Sure, you can find ways to increase the value of your time, but what if you’d rather have more free time than more cash? This is where knowing your core values, doing an Integrity Report, and getting clear about what is most important to you is useful.

Tradeoffs and opportunistic addition – Bill Gates has been named the richest person in the world more than a dozen times. In 2015, he ranked number one yet again with an estimated net worth of $72.7 billion. According to one analyst, “With a worth of $72 billion, a 6% rate of return would earn Gates roughly $114.16 per second he is alive, making it a poor investment for Bill Gates to bother picking up a $100 bill if he dropped it.”

Although interesting and quotable, the idea that it isn’t worth it for Gates to bend down and pick up a $100 bill off the ground is incorrect. Why? Because picking up the $100 bill does not prevent Gates from earning $114.16 at the same time. He will be paid whether he picks up the $100 bill or not. In fact, by picking up $100 Gates will earn $214.16 during that particular second instead of his normal $114.16.

Picking up a $100 bill is not a tradeoff that prevents Bill Gates from earning money. It is an opportunistic addition on top of the money he is already earning. Opportunistic Addition refers to choices that would decrease the value of your time if you spent all of your time on them, but increase the value of your time if you do them at opportunistic moments. For example, consider an author who also does speaking engagements. If they spent all of their time speaking, then they would decrease the value of their time because they wouldn’t write any new books, they would gradually become irrelevant and their speaking rate would decrease. However, by doing speaking engagements every now and then—say, once or twice per month—many authors can add thousands of dollars to their bottom line while still having plenty of time to write new books.

Non-negotiable free time – One of the dangers of calculating the value of your time is that you end up convincing yourself to work another “productive” hour so that you’ll increase the overall value of your time. According to an article in the Wall Street Journal, “Some researchers say assigning an economic value to time risks harming people’s quality of life. Those who are encouraged to focus solely on the dollar value of time tend to feel impatient and pressured, says Jeffrey Pfeffer, a professor of organizational behavior at the Stanford Graduate School of Business. They work more and spend less time in rewarding activities such as volunteering or enjoying music.”

For my part, I decided that I would track my free time to see how many hours I was using for leisure vs. work, but I wasn’t going to place a dollar value on that time. Instead, I elected to say that my free time was non-negotiable. Having free hours where I could relax and decompress made it possible for me to be effective during the working hours that remained. You need to value your free time, down time, and leisurely activities that provide whole health and wellness to your life.

Should you work another hour? – Wondering if you should work another hour? Here’s a good rule-of-thumb I learned from Sebastian Marshall: Consider each hour of your day. 9AM to 10AM, 10AM to 11AM, and so on. On average, do you make net positive or net negative decisions during that hour? For example, if you work late, does the hour between 9PM and 10PM lead to positive outcomes on average? Or does that hour include more mistakes than accomplishments? Does that hour include more procrastination than productivity? If it’s a net negative hour on average, then you should stop working. Working hard on a project is good until the next hour of work burns you out more than it produces something valuable.

Happiness and meaning – If you want, you can account for factors like how much happiness or meaning a task adds to your life. However, rather than build these variables into my actual equation, I decided to rank them for each task from 1 to 10 based on how fulfilling it was for me. I didn’t use these rankings in any equations, but they can act as a tiebreaker between tasks that are close in Expected Value.

Where to go from here

Calculating the true value of your time is actually much harder than it sounds and far more powerful than it seems.

The value of your time will likely change every year, perhaps even faster. The methods I have laid out in this article are flexible and adaptable. As you spend more time in a particular area or earn more income, you can simply plug the new numbers into the spreadsheet and get an updated value of your time.

My hope is that the strategy I’ve shared here will remain useful for you as time goes on.

James Clear

Based in North Carolina, James Clear writes at JamesClear.com, where he uses behavior science to share ideas for mastering your habits, improving your health, and increasing your creativity. To receive his most popular articles, join h...